Investors re-embraced European equities last month but a real reflection of increased risk tolerance will come if they are drawn back into emerging markets. Cherry Reynard reports.
The Federal Reserve surprised bond bears in October by suggesting that quantitative easing (QE) would continue into 2014. This prompted some hasty covering of positions and reversed a long-running sell-off in bond markets.
Nevertheless, equities were still the preferred asset class, with investors moving back into unloved European markets in the hope of an economic recovery.
EPFR data illustrated the trend away from bond funds at the start of October.
Investors had already pulled $61.5bn from the asset class worldwide in the third quarter, the highest figure since EPFR started tracking bonds in January 2004. The only exception to that had been various floating rate fixed income asset classes, such as bank loans, which had continued to see inflows.
Where did the smart money go in October?
However, this flow away from bond funds was halted in the final week of October, after weaker economic data prompted the Fed to postpone the tapering of its QE programme.
Equities were still the asset class of choice for the majority, with many increasingly willing to take additional risk. Global equity fund inflows rose to $21.4bn. Notably, EPFR data showed global investors increasingly willing to invest in the European peripheral countries.
In the third week of October, record inflows were directed towards European and Spanish equity funds. The data found that, during the week ending 23 October, US equity funds saw the largest nominal inflows, but European equity funds saw the greatest increase relative to their size, with even Portugal, Italy, Ireland and Greece attracting inflows.
This may be a reflection of the stronger performance of these markets over the past 12 months. The Athens Composite is up 45%, for example, while the Spanish Ibex is up 24%, the Italian market up 22% and the Irish market up 31%. Investors may be hastily correcting long-held underweight positions.
However, there is also a marked improvement in the economic outlook for some of these countries, with Portugal and Spain predicted by the International Monetary Fund (IMF) to move into budget surplus in 2013.
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